The true reason for the S&P downgrade

You can blame it on the budget deficit; you can blame it on Congress’s inability to force a balanced budget, but these are simply lame excuses designed to lay a smoke screen around the truth. The real reason for the S&P downgrade of US treasuries is the mere existence of a debt ceiling.

There is no dependence between the lifting of the debt ceiling and the budget deficit. The American government must honor its obligations regardless of the budget deficit’s size. The debt ceiling should be eliminated, since each and every time we approach it, we realize that we have no choice but to raise it yet again. Government spending must be conducted responsibly with an eye on the size of the deficit regardless of the existence or the absence of a debt ceiling.

The mere existence of a debt ceiling serves as a warning to creditors that some economically ignorant politicians may decide to hold it hostage or even activate it, should their demands be slighted. It’s the only reason for the lack of AAA confidence in the US ability to fulfill its financial obligations.

Had their demands failed to materialize, the Republican led Tea Party indicated that it was willing to default on US government’s obligation by refusing to raise the debt ceiling. The world was watching in horror as the Republicans took the American and the world’s economy hostage, held a gun to its head and threatened to kill it.

It becomes problematic for a lender to feel that his money is safe at the hands of lunatics who have the ability to pay, but may refuse to honor their obligations, merely because they feel constipated.

One of conservatives’ favorite talking points these days is that the U.S. is going to end up like Greece if we don’t do something drastic. This statement ignores some basic realities.

Greece’s economy is small and relatively insignificant compared to the US economy. Unlike the US, Greece’s debt is not in its own currency. In fact, Greece doesn’t even have its own currency. Unlike the US, Greece’s fiscal and monetary policies are not coordinated because Greece has no control over its monetary policy.

The US can prevent defaulting on its own debt unless it chooses otherwise. All real economists are in the opinion that a country can always pay its debt when the debt is in its own currency. It can simply print more money and devalue its currency and its debt in the process.

In spite of the Great Recession the US has a vibrant economy. Its production capacity, innovative atmosphere and capital levels, are unmatched in the world. Not a single person can say that about Greece.

If we are looking for a red alert, a sounding of an alarm bell drawing our attention to an unacceptable deficit situation, then the value of the dollar relative to the price of US treasuries is a much preferred distress signal. As long as the world markets are willing to invest in US treasuries, they display confidence in the US financial strength and in the value of the dollar. If the dollar goes down in value faster than the price of US treasuries, then buying treasuries is a bad investment. The present situation is the reverse of this indicator; therefore we have not yet crossed the threshold of unacceptable of debt. The world's financial speculators are still willing to invest and hold US treasuries. They vote with their money.

We do not need a balanced budget amendment. A balanced budget means that government expenditures must be equal to its revenues. Moreover, it implies that the government’s borrowing should be curbed because selling treasury bonds enables it to spend over and above its revenue. And in spite of some loud rhetoric by conservatives, most responsible individuals and businesses, do not balance their budgets in the space of a single year.

Living within one’s means does not require that person or business to balance income versus expenses. Most of us sign in on a mortgage when buying our homes, take student loans, finance the purchase of a new car or incur some other form of debt to enable investments and other capital intensive purchases. Businesses sell stocks and bonds to support growth, investments and expenses exceeding their current income.

In short, most people and businesses use leverage to facilitate growth, investments and expenses. They all balance their budget eventually, once loans are fully paid. Except they do so over a long period of time rather than within a single year as proposed by the Congressional Republicans’ balanced budget amendment.

Under a balanced budget amendment Government may be paralyzed at times of emergencies when it’s most needed. It will not be able to act quickly and decisively during unforeseen events like natural disasters such as Katrina, man-made disasters such as wars, or economic calamities such as the collapse of the auto industry, the breakdown of the financial sector or both. History has demonstrated that attempts to balance the budget during an economic depression caused more harm than good, and the damage was not confined to the short term. There is no need for a balanced budget amendment, especially now, when the economy is sluggish and unemployment is high. Shocking the economy at this point by forcing massive budgetary cuts in the short term is insane, unless policy makers are nostalgic about the great depression and feel like living through a greater one.

A cyclically balanced budget was first proposed by the biblical Joseph who argued that government should create a budget (food) surplus in (the next seven) boom years to cover for a budget deficit in (the next seven) lean years. He applied the Keynesian economic model (thousands of years before Keynes was born) of an active government fiscal policy designed to smooth and level economic cycles by providing restrains (in the form of higher taxes and spending cuts) in boom years, while growing government expenditures and lowering taxes during recessions.

Joseph was proved right. He saved Egypt (including his own brothers) from mass starvation.

Bio

Dr. Avi Perry, a talk show host at Paltalk News Network (PNN), is the author of "Fundamentals of Voice Quality Engineering in Wireless Networks," and more recently, "72 Virgins," a thriller about the covert war on Islamic terror. He was a VP at NMS Communications, a Bell Laboratories -distinguished staff member and manager, a delegate of the US and Lucent Technologies to the ITU—the UN International Standards body in Geneva, a professor at Northwestern University and Intelligence expert for the Israeli Government